Bet on this Diwali theme to make lots of money: Vikas Khemani, Edelweiss Securities

Most of the companies which are hitting the market are very high quality companies. Most of these companies have had private equity investors who are now monetising their long held investments.

Talking to ET Now, Vikas Khemani, President & CEO, Edelweiss Securities, says in next 12 to 18 months, focus on anything around affordable housing and you will make lot of money.

Edited excerpts:

This is the IPO market where you have been hitting a home run with so many issues going public. You must be excited with the response some of the issues are getting. These must be good times for you?

Absolutely. The IPO activity is fairly robust and newer sectors are coming and hitting the market. Investors are getting a choice of investing into different sectors. In that sense, it is a welcome move. Also when there is a lot of flow coming to the market if you do not see new paper supply coming through, you will always have a bubble kind of situation because then investors have to buy from within the existing set. It is very essential that as economy expands, as the diversity of the economy builds you see good quality companies, scaled up businesses coming and tapping the markets and which is what the trend has been in the last 12 to 18 months. Of course, when markets are like this, a little bit of euphoria can be felt and you see that is happening in the kind of oversubscription that the issues are getting. That has a rub off effect on the valuations.

Ideally, we do not want to see that but that is the nature of the market. You got to live with that but from a long- term perspective, you will be getting to see a lot more — whether it is life insurance company, asset management, general insurance, reinsurance and multiple healthcare — lots of differentiated consumer players.

Historically it is said the excitement in the IPO market is the harbinger of market top or market bubble. Can you explain why the current action in the IPO market is not an indication of a bubble?

Most of the companies which are hitting the market are very high quality companies. Most of these companies have had private equity investors who are now monetising their long held investments. It is not that these companies got created overnight and do not have solid balance sheets or business plans.

In my opinion typically when a company without solid a business plan, without more concept stocks, start hitting the market and start getting valuation — which we saw in 2007-2008 — when real estate stocks, power stocks or many other stocks without having anything on the ground started hitting the market and investors give them overwhelming response, that is the time in my opinion there is euphoria.
Instead, all these companies which are hitting the market now are coming from stable houses, have very good business models and sustainable trends are at play. Today an insurance company, a life insurance company, healthcare, consumer companies have long 10-20 years of runaway ahead as India unfolds. That is one big differentiator in my mind. Now markets will always have an euphoric situation but one has to be a little bit careful around that, But I am not worried about in the current situation because quality companies are hitting the market now.

What do you make of the paper that is coming in from the insurance side and the valuations at which that paper is hitting the markets? It is not one of those true blue consumption stories where the gain is really about the listing pop. It is more a long-term theme that has done well for investors in for the long haul. How would you advice viewers? In the insurance side, even GIC Re is a bit of a complicated business that is reflecting in the subscription numbers as well. Even though it has gone one time plus, one is still trying to understand the scope and scale of the business in India as more general insurance companies and reinsurance companies set up shops here. What is your own take?

I am very positive and bullish about the long term prospects of these businesses. Having said that, what is worrying point is that lots of investors are coming in these IPOs with the expectation of a quick listing pop. Some of them have been so far right. They have made money also but I think one would never know when it gets into a dangerous territory and so the kind of over-subscription you see across categories, is definitely a worrying sign that also in turns reduces the probability of getting allocation and making decent money on the investments.
I see a fairly large portion of investors who are coming in from a listing pop perspective and I would strongly discourage something like this. Look at these investments only if you are looking to invest in these from a 4-5-year perspective I have no doubt that these are very high quality businesses with the long growth profile ahead of us. Competition will come in but at the same time, these businesses are very good. The industry structure is not very complex even in reinsurance foreign players have always been there though they have been operating out of the foreign offices.

I do not think there is challenge in terms of growth going forward because the Indian market offers a significant growth opportunity. General insurance a significantly under penetrated category, life insurance is still reasonably under penetrated category. I think these are reasonably good quality companies and I remain positive on that them I would strongly caution advice against investing only for the listing pop.

So where are you seeing buying opportunity in the market right now?

In my opinion, the investment cycle is picking up and a very big trend is ahead of us and that is where I feel risk reward of investing right now are in favour. For example, affordable housing is one segment where huge amount of stock is getting built, order book is getting built and over next 12 to 18 months and much before as we get into the election mode, you will say this activity getting accelerated and this will have a ripple effect on lot of things on construction companies, on companies which supply material to building affordable housing stocks.
Currently there is a fair amount of scepticism around how to play investment cycle, whether it is really happening or not. I do believe that over next 12 to 18 months you will see superlative returns. The risk reward of investing into this segment is in my opinion fairly high and institutional activities are low in this segment. The confidence compared to any other sector is lower but I do believe that one should seriously look at that.

You mentioned that investment cycle is likely to pick up. What is the best way to bet on that? Should one buy corporate banks, power companies or is infra names the best way to align your portfolio with a purposeful economic growth in next two years?

The investment cycle will have a rub off effect on a lot of sectors. EPC companies are a big theme to play. There are lesser number of companies and so lots of work is coming their way and I think they will deliver. I do not think valuations are expensive out there at that point given the growth profile ahead of us. Some of the housing finance companies which will be catering to the needs of affordable housing and normal housing, have a huge growth run ahead of you that can deliver reasonably good return.

Some of the consumption companies — whether in building material space or electrical related space that goes into affordable housing – any segment in my opinion is doing reasonably well. Look at power cable business in consumer space growing well,. Consumer durable is reasonably doing well Those are the segments you will find doing well and as long as the growth is there, I do not think we will see case of derating taking place.

I would kind of bet on the stocks and segments where you will find growth coming through reasonable valuations and you can take a sort of bet on these are some of the sub segments. Other sub segments where I am seeing huge amount of reform led sector like chemical and fertiliser where a huge amount of investment cycle is lined up. Over next three to four years they can deliver superlative returns. After a long time, we are seeing industry dynamics changing structurally.

Why is D-Mart commanding a valuation of Rs 70000 crore. What explains this one sided move in a stock like D-Mart?

Definitely it is a euphoric situation. Whenever in a market, in one segment of stocks, there is a high quality company, low floating sstock and investors are just cornering those stocks or buying and holding there for long term, this kind of set up happens. In many such stocks we are seeing unsustainable valuations or over expensive valuations sustaining at this point in time. Now the key question to ask is that from here on over next even five-seven years will the investor deliver superior returns? I do not know, I do not think so.

In 2000, some of the IT majors were trading at 100 PE. I do not have any doubt about the quality of the D-Mart business model, the management and everything else but again every good company, good quality management does not necessarily mean a good investment. From here, can you make significant returns? It is definitely in the zone of euphoria or whatever you can call it. One has to be kind of very careful before investing into this kind of market.

Would I be stretching my luck if I ask for a Diwali idea for our viewers considering the festival is just a week away?

Affordable housing is a theme. In my opinion in next 12 to 18 months, focus on anything around affordable housing and you will make lot of money.